Construction Industry Scheme (CIS) Return

Construction Industry Scheme (CIS)

CIS Return 300 for Contractors and Subcontractors

The Construction Industry Scheme (CIS) is a tax deduction scheme which involves tax being deducted at source from payments which relate to construction work.

Note: Being your accountant, we will prepare and file CIS Return 300 to HMRC after every 05th of month, we will also prepare and email Statement of Deductions for subcontractors and a summary of payments for your records.

Description

Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC).
The deductions count as advance payments towards the subcontractor’s tax and National Insurance.
Contractors must register for the scheme. Subcontractors don’t have to register, but deductions are taken from their payments at a higher rate if they’re not registered. Subcontractors' deductions rate will be either 30%, 20% or 0% based on HMRC verification checks.

Effect of applying CIS Deductions

CIS requires the contractor to deduct tax at source on any payments it makes to the subcontractor. The rate at which tax will be deducted depends on the registration status of the subcontractor. The following three scenarios are possible:
  • if the subcontractor does not register, then the contractor must deduct tax at a rate of 30% from payments it makes to the subcontractor excluding VAT charged by the subcontractor and the cost of materials;
  • if the subcontractor does register, but does not qualify to receive gross payments, the contractor must deduct tax at a rate of 20% from payments – again, excluding VAT charged by the subcontractor and the cost of materials. Even if the subcontractor does not pass the qualifying tests to be entitled to gross payments, it would still be better for the subcontractor to register in order that tax is only deducted at 20% instead of 30%;
  • if the subcontractor registers to receive gross payments, the contractor will not deduct any amounts from the payments at all and tax is then later accounted for by the subcontractor on those payments on its annual tax return. This would be the most beneficial scenario for the subcontractor.
  • If tax is deducted, then a subcontractor which is a partnership or sole trader can treat this tax as income tax on profits. If the subcontractor is a company, the tax deducted can be treated as satisfying relevant liabilities which are amounts due to HMRC in respect of that company's obligations as an employer - for example, PAYE or National Insurance Contributions (NICs).

Contractor's obligations

  • The contractor must register as such with HMRC. This can be done via email, through HMRC's website.
  • As CIS does not apply to employees and only applies to self-employed workers, the contractor must check that the people it is paying are not its employees. The distinction between employees and self-employed workers can sometimes be a tricky legal one. HMRC's website features an employment status indicator which can be useful in cases of doubt.
  • The Contractor needs to verify the status of the recipient of its payments. Verification can only be done once a contract has been entered into, or once the subcontractor has accepted tender for work under a contract. Verification can be done through HMRC's online CIS service or by calling the helpline.
  • Depending on the registration status of the recipient, the subcontractor may have to deduct tax. Tax is deducted on amounts paid, excluding VAT charged and the cost of materials and also excluding VAT on materials if the subcontractor is VAT registered. If the subcontractor has a PAYE scheme, then payment under CIS will be added to PAYE payments and paid at the same time.
  • The contractor must give a written statement to each subcontractor from whose payments it makes a deduction. It is good practice for contractors to provide subcontractors with written statements even if that subcontractor has registered for gross payment.
  • The contractor must keep records of the gross amount paid, the cost of materials deducted, the amount of tax deducted and the verification number, if applicable.
  • A contractor must make monthly returns of its payments to subcontractors to HMRC, even if no payments have been made. The contractor can get HMRC to stop sending it returns for a period of up to six months if it knows it is not going to be paying subcontractors for this period.

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